KeyPublicPolicyDevelopmentsAroundtheWorld

Next week will be very busy in the European Parliament, as it is a committee week.

On Tuesday, the Committee on Transport and Tourism (“TRAN”) will vote on a draft report by Markus Pieper (DE, EPP) on safeguarding competition in air transport. The proposed measures would protect European airlines against unfair competition practices adopted in or by non-EU Member States. It aims to give the EU a better set of tools for scrutinizing unfair practices, and the power to propose countermeasures, including financial ones. See the draft report here.

On the same day, the Committee on Economic and Monetary Affairs (“ECON”), will put questions to Elke König, Chairperson of the Single Resolution Board (“SRB”), the central resolution authority within the European Banking Union.

On Wednesday, the Committee on Industry, Research and Energy (“ITRE”) will vote on a report by Jerzy Buzek (PL, EPP) on common rules for the internal market in natural gas. The new rules would enforce EU gas market legislation on suppliers from non-EU Member States. They would apply to all future gas pipelines leading to the EU from non-EU Member States (including Nord Stream 2). See the draft report here.

In recent months, Congress’s efforts to reform dramatically the Foreign Agents Registration Act (“FARA”) have picked up steam. As we explained in our recent FARA guide, FARA is a complex and broadly worded criminal statute that requires any “agent of a foreign principal” to register with the Department of Justice and file detailed public reports every six months. The breadth of the statute, its criminal penalties, the absence of interpretive guidance, and the growing attention paid to the 1930s era law by federal prosecutors combine to create dangerous and difficult-to-manage risks for multinational companies, lobbying firms, and public relations firms. FARA reform bills making their way through Congress could introduce new uncertainties and sweep still more companies within the statute’s broad scope. In a new client alert, Covington provides a summary of the two bills under consideration, describes the current state of play, and reviews the bills’ implications for multinational and foreign corporations and lobbying and public relations firms with foreign clients.

Following the recent U.S. announcement of tariffs on steel and aluminum imports under Section 232 of the Trade Expansion Act of 1962, the United States is now poised to implement trade sanctions against China stemming from an investigation of that country’s intellectual property (“IP”) practices. Such sanctions, which could include significant and maybe even unprecedented unilateral tariffs and investment restrictions, could lead to a more complicated and uncertain U.S.-China trade relationship.

On August 18, 2017, United States Trade Representative (“USTR”) Robert E. Lighthizer launched an investigation under Section 301 of the Trade Act of 1974 (“Section 301”) of China’s technology transfer and other IP practices. In particular, USTR is investigating “whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.” If USTR finds that action is warranted, it may employ a broad range of possible retaliatory tools—including any “appropriate and feasible action within the power of the President” that the President may direct—to address the situation. The scope for retaliatory action is not limited to industries directly linked to identified harms. Although USTR has until mid-August to release its findings, there appears to be strong political pressure to announce U.S. retaliation in the very near future.

Recent U.S. trade actions, as well as President Trump’s own public statements, suggest that the imposition of tariffs is likely. Earlier this year, President Trump imposed tariffs on imported solar cells and panels and washing machines following a pair of safeguard trade cases under Section 201 of the Trade Act of 1974. And on March 8, the administration announced steel and aluminum tariffs pursuant to Section 232 national security investigations. President Trump himself is a long-time supporter of tariffs. During his 2016 campaign, then candidate Trump advocated for a 45 percent tariff on Chinese imports. The United States is also reportedly considering additional forms of retaliation, including restrictions on Chinese investment and visas.

Public statements suggest that the U.S. may not feel constrained by the possibility of a challenge to its retaliatory measures at the World Trade Organization (“WTO”). In its 2018 Trade Policy Agenda, USTR touted its intent to “use all tools available—including unilateral action where necessary” to “prevent countries from benefitting from unfair trade practices.” Moreover, in its annual report on China’s compliance with its WTO commitments, USTR stated that “the United States erred in supporting China’s entry into the WTO on terms that have been ineffective in securing China’s embrace of an open, market-oriented regime,” adding “it is now clear that WTO rules are not sufficient to constrain China’s market-distorting behavior.”

Such sentiments are being expressed against the backdrop of long-standing concerns about China’s forced technology transfer policies and other IP theft. In fact, the announcement of a Section 301 investigation received wide-spread bipartisan support by U.S. Members of Congress (see, e.g., here and here). While supporters have urged the administration to take strong action, some have explicitly warned that such action should be WTO-consistent.

This past weekend, Ambassador Lighthizer met with trade leaders from the European Union and Japan to discuss the Section 301 investigation and possible actions that could be taken against China. These discussions were scheduled with an eye toward developing a coordinated approach with respect to concerns regarding Chinese treatment of foreign companies. Much of the discussion, however, involved European and Japanese concerns regarding the newly announced U.S. tariffs on steel and aluminum products. There is some concern that the U.S. actions regarding these tariffs could make the EU and Japan less willing to work closely with the United States in addressing longstanding concerns over Chinese IP practices that are the subject of the Section 301 investigation.

While it seeks to reopen dialogue with the Trump administration, Beijing has also signaled that it is prepared to respond vigorously to U.S. trade actions that it views as running afoul of international trade rules. China could retaliate in a number of ways, including by seeking to impose politically-sensitive tariffs whether outright or through its own domestic processes. For example, following the imposition of tariffs on solar cells and panels, China appeared to respond by self-initiating an antidumping investigation into sorghum imported from the United States. Beyond tit-for-tat retaliation, China will almost certainly challenge U.S. trade actions through the WTO. U.S. companies with business interests in China should also be prepared for more informal and opaque actions that impede their business goals in China.

The outcomes of the Section 301 investigation and China’s reaction to these outcomes will have wide-ranging implications for companies doing business in China and the United States.

Next week, there will be a plenary sitting of the European Parliament in Strasbourg, France. Several significant debates, votes and committee meetings will take place.

On Tuesday, Members of the European Parliament (“MEPs”) will vote on a report on cross-border parcel delivery prices. Under the new proposed legislation, part of the e-commerce package, cross-border parcel carriers will be required to report their prices to national authorities and to the European Commission, who will then publish the tariffs. This in turn would allow companies and consumers alike to compare prices more easily. See the report here.

On Wednesday, MEPs will vote on a resolution on the framework of future EU-UK relations prepared by the European Parliament’s Brexit Steering Groupand approved by the Conference of Presidents. The resolution provides that although an association agreement could be an appropriate framework for the future EU-UK relationship, even countries that are closely aligned with the EU, with identical legislation, cannot enjoy benefits or market access similar to EU Member States. See the draft resolution here.

Also on Wednesday, MEPs will vote on the European Parliament’s draft negotiation position on reforms to the EU’s long-term budget, post-2020 (Multi-Annual Financial Framework). The draft negotiating position provides that the EU should promote research programs, support young people and small companies, as well as continue to support farming and regional policies. However, new priorities, including defense, security and migration, should also be financed.

On February 15, 2018, House Foreign Affairs Committee Chairman Ed Royce (R-CA) introduced bipartisan legislation—the Export Control Reform Act of 2018 (“ECRA”)⸺to modernize U.S. export control regulation of commercial and dual-use items. The bill is co-sponsored by the committee’s ranking Democratic member, Eliot Engel (D-NY). The proposed legislation seeks to establish a permanent statutory basis for export control of commercial, dual-use, and less sensitive defense items.

Introducing the ECRA, Chairman Royce emphasized that the need for export control reform is dictated by aggressive Chinese government policies that have increasingly forced U.S. companies to hand over sensitive technology as a cost of doing business in China. In response, the ECRA establishes a framework to protect critical and emerging U.S. technology and know-how. The same issue also has been taken up through the Foreign Investment Risk Review Modernization Act (“FIRRMA”), a bipartisan effort to control outbound technology transfers (among other issues) through the expansion of the authority and operation of the Committee on Foreign Investment in the United States (“CFIUS”). It remains to be seen whether Congress will proceed with the ECRA or FIRRMA, or potentially combine the two efforts.

Key Aspects of the Export Control Reform Act

If enacted as introduced, the potential impact of the ECRA on export controls would be far- reaching:

The ECRA on its face would significantly expand U.S. jurisdiction to regulate the transfer abroad by U.S. and foreign persons of commodities, software, or technology regardless of any U.S. content.

The ECRA would for the first time apply U.S. deemed export controls to transfers of controlled technology to U.S. companies unless they are majority-owned by U.S. natural persons.

The ECRA would establish control over release of technology that includes information at any stage of its creation, such as “foundational information” and “know-how,” in order to protect emerging technology and sensitive intellectual property. To that extent, the bill would require the president to establish an interagency process to identify emerging technologies that are not identified in any U.S. or multilateral control list, but nonetheless could be essential to U.S. national security.

Upcoming Congressional action for the duration of March appears likely to resolve the budget and appropriations impasse of the last several months. House and Senate leaders and the White House were able to reach an agreement last month on topline spending numbers for Fiscal Year (FY) 2018, which began last October 1, and FY 2019. This two-year spending deal will likely put an end to the months of partisan debate over defense and domestic spending caps following five short-term spending bills that led to two government shutdowns. The current stopgap spending measure (P.L. 115-123) expires on March 23, giving members just three short weeks to complete work on a $1.2 trillion omnibus bill.

The budget compromise provides for almost $300 billion in additional federal spending over the limits established by the 2011 Budget Control Act (BCA). House and Senate appropriators are now working to allocate the funds into the 12 annual appropriations bills and draft the legislation that meets the parameters of the agreement. Lawmakers hope to roll these 12 bills into a single legislative vehicle, an omnibus bill, that can pass both chambers before the March 23 deadline. It remains to be seen whether the spending bill could carry a number of controversial policy issues that remain unresolved, including gun control, immigration and border security, and health care, among other topics.

There have been discussions among the White House and congressional leaders about potential gun safety or other related legislation following Florida’s recent disheartening mass school shooting, but Republicans and Democrats are divided on what should and can be done. President Trump has indicated openness to an increase in the age requirement for buying rifles from age 18 to 21, a proposal to extend mandatory background checks to include sales at gun shows and over the internet, incentives encouraging the arming of teachers, and a ban on bump stocks or assault weapons. At least some of these measures would require departures from prevailing Republican orthodoxy. Under application of Senate rules, action there would require some bipartisan cooperation in order to achieve 60 vote thresholds on any of these measures. The Senate could also attempt to strengthen the National Instant Criminal Background Check System (NICS) to prevent criminals from purchasing firearms. Democrats support NICS legislation, although some conservative Senate Republicans have expressed due process concerns. A version of this legislation passed the House in December, but was paired with a provision providing concealed carry reciprocity to legal gun owners. It is unclear whether the House would take up the NICS legislation on its own. It is possible that less controversial gun or school safety measures could be incorporated into the omnibus spending package.

Next week will be a committee and political group week in the European Parliament. MEPs will spend a good portion of their week with their political groups, where they will prepare for the plenary session in Strasbourg, scheduled for March 13-15, 2018. They will discuss, among other topics, the Brexit negotiations, the upcoming EU Council summit on March 22-23, 2018, the long-term budget of the EU, coordination of economic policy, and the common corporate tax base.

On Wednesday, Antonio Tajani, President of the European Parliament, and the leaders of the Parliament’s political groups (who make up the “Conference of Presidents of the European Parliament”) will propose a draft resolution on the future relationship between the EU and the UK. The resolution will be voted on the following week by the plenary session in Strasbourg. President Tajani and Guy Verhofstadt – the European Parliament’s “Brexit coordinator” – will then participate in a press conference on the resolution.

On Thursday, the Committee on Women’s Rights and Gender Equality (“FEMM”), together with the Directorate for Relations with National Parliaments, will host a joint meeting on “Empowering women and girls in media and ICTs: key for the future”. Věra Jourová, Consumers and Gender Equality Commissioner, and Vilija Blinkevičiūtė, European Parliament Women’s Rights and Gender Equality Committee Chair, will be among the speakers.

Meetings and Agenda

Monday, March 5, 2018

Committee on Transport and Tourism

15:00 – 18:30

Debates

Discussion on the amendments on odometer manipulation in motor vehicles: revision of the EU legal framework (INL).

Rapporteur: Ismail Ertug (S&D, DE)

Committee on Civil Liberties, Justice and Home Affairs

15:00 – 18:30

Debates

Joint debate with the Committee Foreign Affairs and with the Delegation for relations with Maghreb countries (DMAG) (15.00 – 16.00)

Bank-fintech partnerships are good for consumers and banks, as I recently explained in testimony to Congress during a hearing on the opportunities and challenges in the fintech marketplace.

Consumers benefit because banks are able to use fintech to deliver safer, more transparent, lower cost and more convenient financial products and services to consumers over the Internet and mobile devices.

Leveraging big data and technology, fintech companies have also been able to offer banks around the country the infrastructure to serve and welcome more people into the financial system. For instance, fintech companies can provide access to a broader range of data and analytics, potentially helping banks to provide more consumer loans responsibly. Richard Cordray, the former Director of the Consumer Finance Protection Bureau (CFPB), noted how “alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources.”

Moreover, the federal banking agencies supervise banks and their service providers to ensure that activities that occur outside of the bank are examined to the same extent as if they were being conducted by the bank itself, thereby protecting consumers and the financial system. Bank-sponsored lending programs with fintech firms are no exception, and the FDIC has published detailed guidance as to how these relationships should be managed and supervised.

New and inconsistent court decisions, however, threaten to undermine bank partnerships with fintech providers and jeopardize the ability of community banks to expand access to credit. Legislative inaction creates uncertainty that can stifle innovation, and leave millions of people with even fewer credit options, pushing them to the fringes of the economy in order to make ends meet.

Thankfully, Congress has already taken an important bipartisan first step towards closing the regulatory hole courts have left on this key issue. Co-sponsored by Representatives Trey Hollingsworth (R-IN), Alcee Hastings (D-FL), Blaine Luetkemeyer (R-MO), and Henry Cuellar (D-TX), the Modernizing Borrower Credit Opportunities Act of 2017, clarifies that banks, as the loan originators, are the “true lenders,” enabling these partnerships to continue helping credit-constrained consumers around the country find responsible credit offered and underwritten by a federally supervised bank.

On February 21, 2018, the U.S. Securities and Exchange Commission (the “Commission”) approved a statement and interpretive guidance that provides the Commission’s views on a public company’s disclosure obligations concerning cybersecurity risks and incidents (the “2018 Commission Guidance”). This guidance reinforces and expands upon previous cybersecurity disclosure guidance issued by the Division of Corporation Finance (the “Staff”) in October 2011 (the “2011 Staff Guidance”). The 2018 Commission Guidance also focuses on two additional issues: (i) maintenance of comprehensive policies and procedures related to cybersecurity, including sufficient disclosure controls and procedures, and (ii) insider trading in the cybersecurity context.

The 2018 Commission Guidance repeats and expands upon the 2011 Staff Guidance, while also providing additional specific guidance around materiality and a public company’s obligation to include discussion of cybersecurity risks and incidents in their periodic reports and registration statements. This includes, among others, providing: specific cybersecurity risk factor disclosure, including with respect to previous or ongoing material cybersecurity incidents; a discussion of the various costs of ongoing cybersecurity programs and responses to ongoing or previous incidents in the company’s MD&A; and a discussion of the board of directors’ oversight of cybersecurity risk in response to Item 407(h) of Regulation S-K and Item 7 of Schedule 14A. This last item was not addressed in the 2011 Staff Guidance, and underlines the importance of addressing the board’s oversight of cybersecurity risks, if material to the company, in the annual proxy statement.

The new guidance puts a sharper emphasis on public companies’ obligation to provide timely disclosure of material cybersecurity incidents or risks. The Commission says that it expects a company to make timely disclosure once it is aware of a cybersecurity incident or risk that would be material to investors, with such disclosure to be made at least before any offer and sale of company securities and before directors and officers (and other corporate insiders aware of the cybersecurity matters) trade in company securities. The guidance encourages companies to disclose a material cybersecurity incident even if such incident would not trigger a current report on Form 8-K. The 2018 Commission Guidance also notes that public companies may have a duty to correct prior disclosure that the company determines was untrue at the time it was made, or a duty to update disclosure that becomes materially inaccurate after it is made (although there is conflicting case law on whether such a duty to update exists).

The 2018 Commission Guidance notes that “[c]ompanies are required to establish and maintain appropriate and effective disclosure controls and procedures that enable them to make accurate and timely disclosures of material events, including those relayed to cybersecurity…” The Commission believes that companies must have effective cybersecurity policies, which include disclosure controls and procedures, that are able to discern the materiality of the cybersecurity risk and the likely impact on the company’s financial condition and reputation. These policies and procedures should be designed to ensure that relevant information about cybersecurity risks and incidents is processed and reported to the appropriate personnel, including up the corporate ladder, so that senior management can make disclosure decisions. Though under this expanded guidance companies still have the ability to take the time to investigate an incident or potential risk and weigh its materiality, an ongoing internal or external investigation of a cybersecurity incident or potential risk is not, on its own, a sufficient basis to delay disclosure of a material incident.

The 2018 Commission Guidance also emphasizes the heightened sensitivity around insider trading when a public company has an ongoing cybersecurity incident that has not been publicly disclosed. The guidance states that companies “should have policies and procedures in place to (1) guard against directors, officers and other corporate insiders taking advantage of the period between the company’s discovery of a cybersecurity incident and public disclosure of the incident to trade on material nonpublic information about the incident, and (2) help ensure that the company makes timely disclosure of any related material nonpublic information.” The 2018 Commission Guidance goes on to say that companies should consider what consequences insiders should face as a result of trading prior to the disclosure of a material cybersecurity event. This guidance raises fresh questions for companies in the midst of cybersecurity investigations. Due to the inherent nature of such investigations, it is often difficult to determine definitively when and whether information relating to the cyber incident becomes material.

Conclusion

The impact that the new guidance will have on cybersecurity disclosure practices is unclear. At a minimum, companies should revisit their cybersecurity disclosures to ensure that they are aligned with the new guidance. Although the new guidance has not added much to the mix in terms of how to approach cybersecurity disclosures, some of the new guidance, particularly the guidance regarding the disclosure of board oversight of cybersecurity, is likely to prompt companies to add to their existing disclosures. In addition, we expect companies to think twice on how they handle information regarding cybersecurity incidents in the context of their investor engagement and trading windows. In light of the emphasis that the SEC and its staff have placed on cybersecurity in this release and other statements, one thing is clear – this will not be the last thing that we hear regarding the SEC’s expectations regarding cybersecurity.

In a ruling with implications for both net neutrality and privacy, the Ninth Circuit ruled en banc today that the common carrier exemption in Section 5 of the FTC Act is activity-based, reversing a 2016 panel ruling that the exemption was status-based. Today’s decision bolsters the FTC’s authority to bring consumer protection (including privacy) and competition actions against providers of Internet access service, which the FCC has ruled is not a common carrier service in connection with that agency’s repeal of net neutrality rules.

This appeal arises from the FTC’s lawsuit against AT&T alleging that AT&T’s practice of throttling the speed of customers with unlimited data plans once they reached a certain data usage threshold violated Section 5 of the FTC Act. AT&T had challenged the FTC’s authority to bring the case, arguing that the company was immune from FTC oversight because it also offers common carrier (e.g., voice telephone) service. Although the district court sided with the FTC on this question, a 2016 Ninth Circuit panel went the other way and, in doing so, created what the FTC and FCC agreed was a potential ‘gap’ in authority in which neither agency would have the right to police many actions by telecommunications companies.

The Ninth Circuit’s opinion begins with the text and history of Section 5, noting that it provides “limited guidance, albeit pointing to an activity-based interpretation.” The court rejected AT&T’s arguments based on language in later amendments (or failed amendments) to the FTC Act that pointed to a status-based exemption because “the view of a later Congress cannot control the interpretation of an earlier enacted statute.” Turning to the common-law meaning of “common carrier,” the court found that the “well-understood meaning” of the term reflected in judicial decisions both before and after the FTC Act’s 1914 passage is that entities may be considered common carriers for some purposes but not others.

The Ninth Circuit also relied on agency interpretation of the common-carrier exemption by both the FTC and the FCC, noting that both agencies have long supported an activity-based approach to the common carrier exemption. Rejecting AT&T’s argument that telecommunications providers must be regulated solely by the FCC, the court found that concurrent jurisdiction is commonplace among federal agencies, citing for example the shared jurisdiction of the FTC and the Department of Justice with respect to antitrust matters.

Finally, the en banc court addressed the effect of the FCC’s 2015 reclassification of mobile broadband as a common-carriage service on the outcome of the appeal. Relying on the strong presumption against retroactivity and explicitly prospective language in the 2015 order (and the 2018 order reversing the 2015 order), the Ninth Circuit held that the reclassification order “does not rob the FTC of its jurisdiction over conduct occurring before the order” and had no effect on the outcome of this appeal.

The Chairman of the FCC and Acting Chair of the FTC both welcomed the en banc panel’s decision. In confirming that the FTC has authority over non-common carrier activities, the en banc panel’s decision removed at least one obstacle to a central thesis of the FCC’s decision repealing net neutrality rules: that the FTC, as a consumer protection and competition agency, should take the lead in overseeing the practices of Internet Service Providers.